An alternative approach has been to identify fundamental tax reforms that can deal more adequately with the new economic realities. One such approach builds on the concept of business cash-flow taxation, first proposed in the late 1970s by the Meade Committee (Institute for Fiscal Studies 1978). Originally conceived as a tax on the cash flows of domestic producers (an ‘origin-based’ tax), the cash-flow tax had many potential benefits, including eliminating the tax on normal returns to new investment, removing tax-based incentives for corporate borrowing, and eliminating the need to measure income of companies with complex business arrangements. But this standard cash-flow tax leaves in place the pressure for international tax competition via incentives for companies to shift the location of profitable activities and reported profits to low-tax countries. This shortcoming led to consideration of a destination-based cash-flow tax (DBCFT), which adds ‘border adjustment’ to cash-flow taxation and has the effect of basing the tax on the location of consumers rather than on the location of profits, production, or corporate residence.

As described in a series of papers, including Auerbach (2017), converting an origin-based cash-flow tax into a destination-based cash-flow involves relieving tax on export revenues and imposing tax on imports, in precisely the same manner as is done under existing value-added taxes (VATs). The key difference from a VAT is that the DBCFT maintains the income tax deduction for wages and salaries, and thus amounts to a tax on domestic consumption not financed by labour income, in principal a much more progressive tax than the VAT.